PSEI Philippines 2026: Can the Rebound Survive Rising Inflation?

The Philippine Stock Exchange Index (PSEi) hit 6,140 in September 2025, its lowest close since the pandemic. Rising U.S. interest rates, a weak peso, and global risk aversion had driven foreign investors to pull $2.3 billion from Philippine equities over the preceding 18 months.

Since that low, the PSEi has rallied 18 percent to 7,240, making it one of the best-performing markets in Southeast Asia in early 2026. The recovery has been led by banks (BDO Unibank, BPI) benefiting from wider net interest margins, property developers (SM Prime, Ayala Land) catching up after three years of underperformance, and the peso’s stabilisation at ₱56.20 per dollar, which has lured foreign portfolio flows back.

The biggest threat to the PSEi rally is food price inflation, which has run above the Bangko Sentral ng Pilipinas (BSP) target band for 18 consecutive months. January 2026’s headline Consumer Price Index (CPI) came in at 5.4 percent year-on-year, with food inflation at 7.8 percent — driven by rice (+12%), vegetables (+9%), and fish (+6%).

The Philippines imports roughly 20 percent of its rice consumption, making it uniquely vulnerable to global rice price shocks. India’s export restrictions, which were partially lifted in late 2025, still cap shipments of non-basmati white rice. Vietnam’s harvest was disrupted by Typhoon Yagi’s lingering effects on Mekong Delta irrigation. These supply constraints have kept Philippine rice prices elevated despite government tariff reductions under Executive Order 62.

High food prices have a first-order effect on monetary policy. BSP Governor Eli Remolona has signalled that rate cuts — which the market is pricing at 75 basis points by year-end — will be delayed until CPI falls sustainably below 4 percent. Without rate cuts, the property and consumer sectors that have led the rally may stall.

Foreign investors have returned to Philippine equities in 2026, with net inflows of ₱210 billion ($3.7 billion) year-to-date. The primary driver is the narrowing interest-rate differential between the Philippines and the United States. The Federal Reserve cut rates to 4.0 percent in 2025, while BSP held at 6.0 percent, creating a 200-basis-point carry that favours peso-denominated assets.

The peso’s stability has been critical. After touching ₱59 per dollar in October 2025, the currency has appreciated 5 percent to ₱56.20, supported by record overseas Filipino worker (OFW) remittances of $39 billion in 2025. The current account deficit has narrowed to 1.8 percent of GDP from 3.4 percent in 2024, reducing the Philippines’ external vulnerability.

However, foreign flows into Philippine equities remain fickle. A reversal of the Fed’s easing cycle or a renewed risk-off episode in global markets could quickly turn inflows into outflows, as happened in 2022 and 2024. The PSEi’s low free-float market capitalisation of $110 billion makes it particularly sensitive to portfolio rebalancing by large global funds.

Philippine banks are outperforming the broader index by a wide margin. BDO Unibank, the country’s largest bank by assets, has risen 32 percent since September 2025. Its net interest margin of 4.2 percent is the highest in ASEAN, reflecting the BSP’s elevated rate environment. Bank of the Philippine Islands (BPI) is up 28%, with non-performing loan ratios steady at 2.1 percent — well below the 3.5% pandemic peak.

Property is recovering from a deep trough. SM Prime Holdings, which controls 80 percent of Manila’s premium mall space, reported foot traffic returning to 2019 levels in Q4 2025. Ayala Land’s residential pre-sales rose 24% year-on-year as OFW remittances fuelled housing demand in Cebu, Davao, and Clark.

Infrastructure plays benefit from the Marcos administration’s ₱9 trillion Build Better More programme. Metro Pacific Investments, which operates toll roads and water utilities, has seen earnings growth of 18 percent, funded by PPP contract wins in the Manila subway and Cebu-Mactan bridge projects.

The PSEi offers an attractive entry point for investors with a 12-18 month horizon. At 12.5 times forward earnings, it trades at a 30 percent discount to its 10-year average P/E of 17.8 and a significant discount to Indonesia (14.2x) and India (21x). The dividend yield of 2.8 percent, while modest, exceeds the FTSE All-World Asia Pacific average.

The key conditions for the trade to work are: (1) CPI falling below 4 percent by Q3 2026, enabling BSP rate cuts; (2) the peso remaining stable at ₱55-57 per dollar; (3) no significant deterioration in the South China Sea geopolitical situation, which would impact consumer confidence. If these conditions hold, the PSEi could reach 8,200 by year-end, implying 13 percent upside from current levels.

The risk is a stagflation scenario where food inflation remains elevated, forcing BSP to hold or raise rates while GDP growth slows below 5 percent. In that scenario, the rally reverses and the PSEi retests 6,500. Position sizing should reflect this binary outcome distribution.